Sebi proposes stricter norms for AIFs, key personnel to prevent misuse of fund structures

Sebi on Friday proposed stricter norms for Alternative Investment Funds (AIFs), its managers and key personnel amid instances of the instrument being used to facilitate evergreening of stressed loans and circumvention of other financial sector regulations.

The proposal is aimed at enhancing trust in the Alternative Investment Funds (AIF) ecosystem to facilitate ease of doing business measures, according to a consultation paper issued by Sebi.

''While the AIF industry has registered robust growth over the years, a number of instances of AIFs being structured to facilitate circumvention of different financial sector regulations have come to light, thereby eroding trust in the system,'' Sebi said.

To ensure sustained capital formation, it is important to take steps to restore the trust and prevent such circumvention, while at the same time ensuring minimal impact on legitimate AIF investments, it added.

In its consultation paper, Sebi has proposed to introduce a general obligation in the existing AIF regulations that would require AIFs, managers and their key management personnel (KMPs) to ensure that their operations and investments do not facilitate circumvention of regulations administered by any financial sector regulator.

The enhanced trust that should result from such a process, along with a process to verify adherence to the accompanying standards, would provide a regulatory comfort in considering other ease of doing business proposals relating to AIFs which are under examination with Sebi, the regulator said.

The Securities and Exchange Board of India (Sebi) has sought comments from public till February 11 on the proposals.

Compared to other Sebi-registered investment channels such as mutual funds and Portfolio Management Services (PMS), AIFs have a relatively light-touch regulatory regime.

''Over the past few months, Sebi has come across more than 40 cases involving over Rs 30,000 crores (out of investments of approximately Rs 3.5 lakh crore ) where AIFs appear to have been structured to facilitate circumvention of certain financial sector regulations,'' it said.

Some of the identified modus operandi where AIFs are being structured to facilitate circumvention of financial sector regulatory frameworks such as '“ever-greening of loans by regulated lenders and circumvention of FEMA as well as QIB (Qualified Institutional Buyer) norms. AIFs have been set up resulting in ever-greening of stressed loans of some regulated lenders, thereby circumventing RBI regulations and disclosure requirements around asset restructuring and recognition of non-performing assets.

''The identified circumventions have already assumed significant levels (over Rs 30,000 crore out of investments of approximately INR 3.5 lakh crore) and Sebi has not yet completed its thematic inspections. Such practices seriously impact the overall trust and integrity of the AIF ecosystem,'' Sebi said.

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